UK FCA confirms final guidance to accompany anti-greenwashing rule

The Financial Conduct Authority (FCA) has published finalised non-handbook guidance on its anti-greenwashing rule that comes into force on 31 May 2024 and will apply to all regulated firms in the UK.

Tackling greenwashing is a priority for the FCA, and it is bringing in the new anti-greenwashing rule to enable it to take action against firms that make misleading sustainability-related claims about their products and services.

Draft guidance relating to the rule was first published and consulted on in November 2023, at the same time that the FCA finalised its flagship sustainability disclosure requirements (SDR) and investment labelling regime amid significant recent supervisory developments in both the UK and EU regarding the risks of greenwashing in the financial services sector – with firms preparing for the rule changes in May.

The anti-greenwashing rule will be added to the ESG Sourcebook at ESG 4.3.1R and requires firms to ensure that any reference to the sustainability characteristics of a product or service is consistent with the sustainability characteristics of the product or service and is fair, clear, and not misleading. "Sustainability" refers to both environmental and social sustainability.

Finalised guidance

The finalised guidance follows the draft guidance very closely. One area of feedback from the consultation was a request for examples of good practice. The FCA has obliged and has included two examples of good practice that will be of assistance to firms. The takeaways from these examples are clear and robust standards for sustainability characteristics, continuous monitoring, and clear explanations in marketing materials.

An area of the guidance that remains unclear and will be of concern to many firms is the extent to which statements a firm makes about itself are caught by the new rule. The guidance says that the scope of the anti-greenwashing rule relates only to claims made regarding products and services.

It goes on to say that existing consumer protection law, including the guidance published by the Advertising Standards Authority and the Competition and Markets Authority, as well as FCA Principles 6, 7, and 12, can apply to sustainability-related claims that a firm may make about itself as a firm.

'Representative picture'

However, the guidance also says firms should consider whether information about the firm itself may be considered part of the "representative picture" of a product or service, which would bring this information within the scope of the new rule. It is not clear when the FCA will consider information to be part of the representative picture.

Firms will need to consider carefully claims made about the firm itself as they will certainly be subject to existing consumer protection law as well as existing FCA principles and may also fall within the new rule. This potentially imposes a very high compliance burden on firms who want to brand themselves as sustainably focused.

Third-party data

Another area of potential concern for firms is reliance on third-party data when substantiating sustainable claims. The FCA says that firms should consider the "appropriateness" of relying on third-party data.

This does not offer much guidance. Firms would be well-advised to document their reasons for relying on third-party data when making sustainability claims, even if it is simply to record that the third-party data comes from a reputable source and represents an industry standard. This way, the firm will have a paper trail of having considered the appropriateness. Firms should also consider whether it would be appropriate to make the data available to customers for full transparency.

Proactive enforcement

When the new rule comes into force on 31 May, the FCA is likely to be proactive in terms of enforcement. There is no implementation period, and the FCA will be unsympathetic to pleas that firms were not ready for the new rule, given its implementation has already been delayed once and, according to the FCA, it merely confirms pre-existing rules and standards.

This is also an issue that could produce private law claims under section 138D of the Financial Services and Markets Act 2000 if customers are able to establish they have suffered financial loss as a result of greenwashing. Greenwashing is, therefore, a high-risk area for all regulated firms that make any sort of claim about being sustainable.

Osborne Clarke comment

If firms are not prepared for the new anti-greenwashing rule, they should take action now by reviewing all communications that refer to the sustainability characteristics of products and services to ensure that they are fair, clear, and not misleading, and capable of substantiation with credible evidence. Firms will need to enhance their internal processes and policies to ensure they have robust controls around the making of sustainable claims.